Case Study Analysis: Deregulation & the 2008 Financial Crisis

This case study analyzes the 2008 financial crisis, triggered by the bankruptcy of Lehman Brothers and the downfall of AIG, resulting in a global recession. The primary causes were deregulation of banks, risky investments in subprime loans, and the securitization food chain involving homebuyers, lenders, investment banks, and rating agencies. The proposed solution involves stricter rules and regulations for loans, government monitoring of banking operations, and significant penalties for violations. The author reflects on the impact of banking misconduct, inflated appraisals of CDOs, and doctored loan documentation, which led to the decline of US companies. The crisis shifted the focus towards the IT industry, fostering education and employment in the sector, ultimately leading to economic restructuring and recovery.

Running head: INSIDE JOB
Inside Job
Name of the Student
Name of the University
Author Note

1INSIDE JOB
Description:
The economic crisis that created significant turbulence in the financial structure of the
America was significant. The crisis was evident in the month of September of 2008 when the
country observed the bankruptcy of the US investment bank Lehman Brothers and the
downfall of the world’s largest investment company American International Group (AIG).
The American Stock Market was observed to have the largest single point drop as a
consequence of the event. As a result, the world experienced a global recession where people
lost considerable amount of their wealth. Along with that, almost 30 million people were
subjected to unemployment and it was on verge of forcing 15 million of people below the
poverty line. However, it was not something that appeared without any sort of notice. Rather
the business conduction of the US banks and the rise of the US financial sector in the year
1980 were the major reason behind this.
Main Problems:
The major problem for such huge crisis was the deregulation of the banks. The
moment the bank went public, it was subjected to huge amount of stakeholder money and
was significantly interested in the risky investments. Unfortunately, the payment of
considerable loan amounts was observed to get failed.
Along with this, the investment banks were significantly preferring the subprime
loans. The banks implemented the mentioned strategy just because these loans were subjected
to higher rates of interest. As a result, it increased the predatory lending.
The securitization food chain was a major reason as well. The new format of the chain
observed four sections, which are homebuyers, lenders, investment banks and the investors
along with the rating agencies of the Collateralized Debt Obligation (CDO). The lenders
started to conduct riskier loans as they did not have the liability or concern regarding the

2INSIDE JOB
payment and on the other hand, the investment banks were selling the CDOs without any
concern as well. Apart from that, the rating agencies of the CDO were giving inappropriate
rating. All these were significantly influential in creation of the “Bubble” that was one of the
main reason behind the collapse of the US financial structure.
Solution:
The primary solution in this case will be the formation of the strict rules and
regulation regarding the loans. The banking organizations needs to be significantly careful
regarding the loans procedure and must form individual department in order to evaluate the
credibility of the loan requesters. The government needs to act strongly on this with the
construction of the rules regarding the banking sectors and the violation of them must force
the banking organizations to pay considerable amount money. This will be significant as the
fear of the fine will make sure that the banking organization follow the guidelines inn an
ethical manner. The government must implement a section of the finance ministry in order
monitor the operations of the banking organizations.
Opinion:
The case specifies the particular method of how the ill-minded and unethical business
concept affects the overall economy of a country. The banking organizations are observed to
conduct this sort of unethical business in order to gain more profit and survive in the intense
market competition. In doing this, they hardly evaluates the credibility and the amount of
assets of the loan requester in hope of getting higher rates of interest and when the loan
payment gets failed, the banking organizations extracts the money from the general
customers by reducing the interest rates in their specified packages. The mentioned method of
recovering the money is highly unethical which needs to be countered with the formation of
the strict banking guidelines.

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Reflection and Learning:
The case is significantly helpful for me in order to assess the impact of the banking
misconduct. From the case, I am able to understand the effect of the inflated appraisals of the
CDO in creating a state where the prices of the houses and apartments were abnormally
increasing. The creation of the doctored loan documentation had a major part in the formation
of the crisis and that was significantly evident with losing grip of the US companies like US
Steel or General Motors in the global economy. However, the crisis shifted the focus of the
American economy towards the Information Technology industry as the American
organizations started to follow the outsourcing model in their existing business operations.
The IT industry significantly requires educated and efficient employees and that was
significant in the growth of the education in US as the focus of the unemployed employees
and the youth was shifting towards the IT industry for employment. With an effective
restructuring in the society and the economy, the people of US came out of the crisis and
positioned themselves as one of the leading nations in the Information Technology industry.